Making the most of AWS’s reserved instances

What makes the CIO choose a cloud service? Is it the reliability of the service being offered, or the range of products?

What makes the CIO choose a cloud service? Is it the reliability of the service being offered or the range of products? Is it the ease with which the provider can be integrated with an existing infrastructure? Is it price? Or is it a mixture of some or all of these?

These are questions that nearly all organisations are grappling with, as cloud moves from hype to the mainstream.

Providers are fighting a war for customers on all fronts, cutting costs here while introducing new services there.

But one thing's for sure – no-one can complain that the industry is standing still. And the clear market leader – Amazon Web Services – is not holding back when it comes to keeping up with customer demand.

Weighing up the need for reserved instances

In December 2014, Amazon Web Services (AWS) streamlined its reserved instances offering.

The old system was extremely complex, with a variety of prices depending on how heavily the reserved instances were used.

The new pricing does away with those layers. The level of discount depends on whether the user pays for all the reserved capacity upfront, pays partially upfront or doesn’t pay for any in advance.

Under the new pricing scheme, users can reserve virtual machines for one year or three years. The levels of discount depend on a variety of factors, including the specs of the cloud instance and the length of the reservation.

"When we made the changes, we did it largely in response to what customers were telling us. This announcement has simplified the model," says Paul Duffy, head of product marketing for AWS. 

The move changes the focus to attract business decision-makers, says Owen Rogers, cloud pricing analyst with The 451 Group. "Amazon has been about selling to the technologists, but I think this move is about appealing to the business leaders – it’s more about reducing risk and liabilities.

"Potential customers need to be aware, however, that they are using what they’re committed to – opting for reserved instances does entail some careful calculation of what’s needed."

CIOs should not opt for the discounts of reserved instances as a matter of course. Instead they should be fully aware of their commitment, agrees Kim Weins, vice-president of marketing at cloud management and analytics company RightScale. Weins says a users need to be running a minimum of 222 days of the year before a reserved instance comes out ahead of an on-demand instance.

But CEO of cloud broker Strategic Blue James Mitchell says those businesses which opt to make no advance payment will potentially pay a huge interest rate. 

Users need to be running a minimum of 222 days of the year before a reserved instance comes out ahead of an on-demand instance on price

As an example, he cites a large Linux-running instance using one of AWS’s US east coast facilities. Customers paying the full amount upfront are charged $542, but those who pay nothing in advance but make 12 monthly payments are stung for a fraction under $640 – in other words, the interest rate is 36.7%. Customers making a partial payment are more protected, Mitchell says, but even then they could be facing an interest rate of nearly 10%.

Cost versus services

Amazon’s move comes as the market in the public infrastructure-as-a-service (IaaS) space is becoming extremely competitive. In autumn 2014, Synergy Research Group revealed that Microsoft was, if not exactly breathing down Amazon’s neck, showing the fastest growth among the cloud infrastructure providers, boasting a 136% annual growth in cloud revenues. Although it should be pointed out that Microsoft’s total cloud turnover is completely dwarfed by Amazon’s, and there’s a long way to go before that gap is breached.

With its reserved instances, Amazon is providing something that’s not offered by its main competitors. Microsoft did offer a similar service, but discontinued it in early 2014 (although it still offers discounts to customers who made a long-term commitment before the company pulled the plug). The Microsoft way was to offer a pay-monthly option or pay upfront – a similar approach to that adopted by AWS.

The company offers little in the way of such discounts now, although there are certain benefits offered. For example, MSDN subscribers are granted a discount and there also deals for startups and academic institutions but, on the whole, Microsoft doesn’t go down the cost-cutting approach.

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The company believes that its main appeal is that organisations are able to keep their existing IT infrastructures and build on that. The belief is that the more straightforward integration of cloud and on-premise and a single management platform provides a more compelling argument than the odd discount here and there.

The 451 Group’s Rogers has sympathy for this view. "Consumers are more interested in breadth of services than prices. If I were the CIO, I’d choose the provider which fitted my needs. I certainly wouldn’t want to base my career on a provider that offered the best price – I would want one that offered the best range of services," he says.

However, having chosen a cloud provider, Rogers says it makes sense to get together with the CFO and work out how to reduce the cost of cloud services. "This is where AWS comes in – one of the best ways to do that is to opt for reserved instances."

The third of the big public cloud providers, Google, takes an altogether different approach. Google doesn’t offer cloud discounts on reserved instances on its Compute Engine. Instead, it offers a "sustained use" discount, which is applied automatically once a user runs an instance for longer than 25% of a billing cycle. If you use an instance throughout the entire billing cycle, your net discount on it will be 30% – a much simpler discount system than Amazon’s reserved instance model.

It’s a pricing model that gets qualified support from Rogers ."If you’re looking on paper, then the Google sustained use model is an attractive one. It’s automatic and consumers don’t have to take any risk."

Consumers are more interested in breadth of services than prices. If I were the CIO, I’d choose the provider which fitted my needs. I certainly wouldn’t want to base my career on a provider that offered the best price

Owen Rogers, The 451 Group

RightScale’s Weins says: "When it comes to pricing, AWS has always been aggressive, even when it had the market on its own, but Google has upped the game. The company cut prices by 38% in 2014. It thinks price drops of 30% a year will continue to put pressure on AWS."

For Rogers, while the discounting will continue, he doesn’t believe it’s ultimately a battle about price. He’s been monitoring cloud costs over the past few months and says there’s remarkable consistency. 

When it comes to the cost of VMs [virtual machines] and storage, the service providers will match each other. There is, however, more excitement in higher-value services – that’s where the commercial advantage is going to be," he says.

Rogers predicts that is going to be the battleground for the future: "Theoretically, it’s possible that the cost of VM and storage could come down to zero, but I don’t think it’s likely to come to that." 

However, while prices will continue to be cut, the companies that win out will be those that offer greater innovation and better customer support.

The cloud customer now has more choice than ever. AWS provides several ways of paying, Google offers its sustained use discount, while Microsoft is happy to keep up with cost-cutting but shies away from discounting, content to dwell on its range of services.

If Rogers is right, the discounting will matter less and less in the future, but in the meantime, there are plenty of options for the CIO to keep the finance department happy.

This was last published in January 2015

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